Yum's Fourth Quarter Dented by Taco Bell E. Coli Crisis

Marketer Loses $20 Million in Recovery Effort but Still Posts 1% Gain

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CHICAGO (AdAge.com) -- Yum Brands said today that the December E. coli crisis at Taco Bell cost the parent company $20 million in operating profit in the fourth quarter -- half of that in lost sales and the remainder from recovery expenses including consumer research, marketing and legal costs.
Analysts estimated that same-store sales at Taco Bell fell as much as 20% in late December but management wouldn't detail the actual declines.
Analysts estimated that same-store sales at Taco Bell fell as much as 20% in late December but management wouldn't detail the actual declines.

In announcing the quarterly results today, Yum said the "Taco Bell incident" that sickened 71 people in five states weakened the parent company's domestic results, flattening same-store sales in the quarter for its combined taco, pizza and fried-chicken brands. Yum, however, did end the year up 1% domestically.

'Severely impacted' sales
David Novak, Yum chairman-CEO, told analysts during a conference call that the incident "severely impacted" sales and profits that would have otherwise have "been on track." Taco Bell's 5% same-store-sales decline for the quarter pulled down Yum's overall numbers: Domestic companywide same-store-sales declined 2% for company-owned stores and were flat for the entire system (company owned and franchised).

Analysts estimated that same-store sales at Taco Bell fell as much as 20% in late December vs. the comparable period the prior year, but management wouldn't detail the actual declines for the month. Executives did say the crisis affected the final three weeks of the quarter but that the chain began recovering quickly after that.

"We were actually surprised with how rapidly the brand is recovering from significant sales declines in December," said Mr. Novak, adding, "We are still not all the way back, particularly our Northeast markets." Although the strength of the brand with core users is as strong as it was before the incident, "the challenge is to get light users back in our restaurants," he said. "You know, brands can even go forward or back on how they deal with crisis, and our customers have told us we definitely did a good job of restoring confidence."

Mixed reviews on PR
Taco Bell got mixed reviews on how it handled public relations around the E. coli outbreak. Whereas some experts praised the brand for its constant updates, many bloggers bashed the chain's hastily produced TV and print ads that featured Taco Bell President Greg Creed.

Now, in what appears to be a Tylenol recovery approach, Taco Bell has added "another level of testing" for its lettuce supply, said Mr. Novak. "We are the first company to do that in our industry -- to go to this extra level of testing and increasing the safety of our products." Lettuce has frequently been pointed to as a culprit in other E. coli outbreaks even when scientists have been unable to definitively prove a connection between the vegetable and the bacteria.

Mr. Novak tried to instill confidence for the year ahead on new Taco Bell products such as Taquitos, launched during the Super Bowl, and said the brand can reach same-store sales gains between 1% and 2% for 2007.

"We will definitely be challenged by a weak fourth quarter given how we ended 2006 and the tremendously positive lap we had in the first quarter of last year," said Mr. Novak. Yum enjoyed a 19% gain in same-store sales and Taco Bell was up 8% in the first quarter last year. "This tough overlap coupled with Taco Bell's ongoing sales recovery makes it tough sledding in the first quarter, but we expect much stronger growth in the second half."

Pizza Hut, KFC also slide
Yum brands KFC and Pizza Hut each posted same-store-sales declines of 1% for the fourth quarter. The fried-chicken chain will look to bounce back by building on its Variety Bucket, Snacker, Flavor Station and Famous Bowls platforms in the first half of 2007. It will also import some new products from its international division later in the year.

Based on consumer research, the Pizza Hut rebranded itself as "America's Favorite Pizza" with a January campaign built around pan pizzas for $10 with several toppings. In addition, Yum plans to improve Pizza Hut's everyday value and delivery services. "We continue to feel confident of the turnaround we believe is in process," said Mr. Novak about Pizza Hut.
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